M&A bankers in Europe may have to wait another year for a significant rebound in activity, according to Financial News analysis which suggests declining multiples, waning confidence and a reluctant investor base could mean 2011 is another damp squib.

The findings fly in the face of widespread optimism among bankers and analysts about a bounce-back in European M&A this year. Citigroup analysts are predicting a 25% jump on last year, and UBS believes there could be 30% to 50% more transactions worth more than $1bn than in 2010.

According to Dealogic, European M&A volumes added up to $67.8bn in January, fractionally up on last year and the best January since 2008.

However, stripping out spin-offs to existing shareholders, the total was just $44.9bn, making it the worst January excluding spin-offs since 2003.

Deal numbers are also falling. Europe saw fewer deals last month than in any January since 2005; and the UK has witnessed fewer deals than during any January in more than a decade.

Pat Guerin, co-head of European mergers and acquisitions at UBS, said: “M&A very rarely springs back.

The outlook is slowly improving but the recovery is likely to be a long process over a number of years.”
One head of UK investment banking at a global advisory firm said: “Anyone who tells you this year will be much better than last year is lying.”

Several other key indicators of future M&A activity paint a less than rosy picture. Forward price to earnings ratios, which compare share value to projected earnings, are falling, reflecting declining confidence, according to KPMG.

The correlation between equity markets and M&A – M&A activity usually picks up two to three quarters after the markets start rising – has been conspicuous by its absence.

Giuseppe Monarchi, head of mergers and acquisitions for Europe, the Middle East and Africa at Credit Suisse, said: “The reality is that there is a bear case and a bull case.

“Activity continues to be volatile, with busy months and quiet months. The bear case says that short-term visibility is still muddled and news flow is still destabilising.

“On the other hand, equity markets are starting to recover and corporate cash levels remain at record highs. I tend to think the market will be up on last year but there are forces pulling in both directions.”